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CalPERS’ forestry portfolio gathers pace but remains in the slow lane

The $351bn pension fund’s results in real assets at large exceeded the benchmark by 1.19 percentage points, driven by infrastructure.

The California Public Employees’ Retirement System’s forestry portfolio is still struggling to pick up pace despite being in the recovery phase. Meanwhile, the $351 billion pension fund’s broader real assets program is beating its benchmark.

CalPERS, based in Sacramento, reported on Thursday a preliminary 8.6 percent return for its total portfolio for the 2017-18 fiscal year. In a video, CalPERS chief investment officer Ted Eliopoulos credited “strong performances” from infrastructure, real estate and public and private equities, even though the total fund was 6 percentage points under its benchmark index.

“While we’ve seen some expected volatility in the markets, our diversified global portfolio has allowed us to exceed our expected rate of return of 7 percent,” Eliopoulos said in the video. “While we’re pleased with the returns, we’re always focused on the long-term, bigger picture.”

At 1.9 percent, forestland was 1.87 percentage points below its index. That compares unfavorably with infrastructure, which beat its benchmark by 14.16 percentage points thanks to a 20.6 percent performance. But it does mark an improvement on last year, when the fund’s 1 percent return was 2.68 percentage points below its index.

CalPERS is currently working on rebalancing its portfolio away from “value-add” timberland and towards a greater proportion of “core” assets. The latter represented just under half of the forestry portfolio at the end of December, short of a policy range of between 75 percent and 100 percent.

Forestry, together with real estate and infrastructure, made up CalPERS’ $36.7 billion real assets portfolio as of 30 April. As a whole, the real assets portfolio returned 8 percent at 1.19 percentage points above its benchmark. Real estate generated a 6.8 percent return – 0.26 percentage points below its index.

The $26.96 billion private equity portfolio generated returns that were 2.5 percentage points above its index at 16.1 percent – the second-highest for the most recent fiscal year. Public equity, CalPERS’ largest portfolio at $172.53 billion, produced the third-highest return at 11.5 percent – 0.42 percentage points under its benchmark.

CalPERS noted that real estate returns, as well as private equity, are based on market values as of 31 March.

CalPERS’ overall return for the 2016-17 fiscal year was 11.2 percent, which was 0.15 percentage points under its benchmark. The total portfolio at the time held $323 billion in assets.

Last year, real estate, forestland and real assets had 7.6 percent, 1 percent and 8 percent returns, respectively. CalPERS created the larger real assets portfolio in April 2017 because the three strategies share similar investment characteristics.

The pension’s five-, 10- and 20-year investment returns are now 8.1 percent, 5.6 percent and 6.1 percent, respectively. “That’s our focus,” instead of emphasising an individual year’s returns, Eliopoulos said. He added that CalPERS’ funded status has increased from 68 percent to 71 percent over the last fiscal year.

Eliopoulos, who joined CalPERS in 2007, announced in May that he will leave the pension fund next year. He said in a statement that he will stay on as CIO until CalPERS finds his replacement and will assist with the transition.